Referrals in Search Markets
AbstractThis paper compares equilibrium outcomes in search markets with and without referrals. Although consumers would benefit from honest referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage a consumer to purchase the product elsewhere. In a model of a horizontally differentiated product and sequential consumer search, we show that valuable referrals can arise as a part of equilibrium: firm will give referrals to consumers whose ideal product is sufficiently far from the firm;s offering. The effect of referrals on the equilibrium prices is examined, and it is found that prices are higher in markets with referrals. Although consumers can be made worse off by the existence of referrals, referrals lead to a Pareto improvement as long as search cost is not too low relative to product heterogeneity. The effects of referral fees and third-party referrals are examined and policy implications are drawn.
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Bibliographic InfoPaper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0521.
Date of creation: Jul 2005
Date of revision:
Other versions of this item:
- Maria Arbatskaya & Hideo Konishi, 2005. "Referrals in Search Markets," Boston College Working Papers in Economics 614, Boston College Department of Economics, revised 10 May 2011.
- Maria Arbatskaya & Hideo Konishi, 2010. "Referrals in Search Markets," Emory Economics 1004, Department of Economics, Emory University (Atlanta).
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D4 - Microeconomics - - Market Structure and Pricing
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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